142-Hostility’s End Game

The late 80’s and 90’s were hostile times for the beer industry. The period saw constant price wars. All the domestic competitors, except for Anheuser Busch, suffered from relatively low returns. A hostile industry is notable for constant pricing pressure and very low returns in the industry. The brewing industry certainly fit that description for a long period of time.

Then came the 2000’s. This decade brought a great deal of consolidation to the market. InBev bought Anheuser Busch. SabMiller PLC consolidated operations with Molson Coors Brewing Company. These changes, and others, produced a consolidated industry. Today, the two largest companies control 80% of U.S. beer sales. These companies have introduced products at every price point so they dominate the market at virtually all Price Points.

This dominance gives the industry Standard Leaders pricing leverage. Over the last year, the price of beer, ale and other malt beverages grew 4.6%, while overall consumer prices in the U.S. fell 2.1%. The beer makers now have pricing power that looks much like that of the breakfast cereal makers and cigarette manufacturers. The brewers are able to raise prices, even in the face of declining unit volumes, just as the cigarette manufacturers are able to do. Profits in the domestic market are rising at more than 25% a year. (See the Perspective, “What Makes Returns High?” on StrategyStreet.com.)

Hostile markets end in one of two ways. (See the Perspective, “What Ends Hostility?” on StrategyStreet.com.) Either demand bails the industry out or industry consolidation shifts pricing power back to the industry. In our extensive work in hostile markets, we have observed that three quarters of the time demand growth bails out a hostile industry. The demand in the industry grows and gradually sops up excess capacity. As the excess capacity ebbs away, pricing power returns to the industry participants in order to encourage the addition of the capacity that the customers will need in the future. In the other quarter of the cases, the industry consolidates until four or fewer competitors own at least 75% of the market. And, all remaining competitors must have reached the conclusion that trying to gain share with low price is an exercise in futility. The beer industry has consolidated far more than the average industry. In the average domestic industry, four competitors to own 85% of the total industry market share. In brewing, it only takes two to approach that concentration.

Not many industries succeed at reaching this degree of consolidation. But once they do, the world is their oyster.

Posted 10/5/09

Update:

Despite the difficult Covid years, AB InBev continued its profitable ways.  The largest brewers still control pricing.   AB InBev relied on higher prices and customer preferences for Performance Leader products to provide it with good returns in 2021.

By 2010 Anheuser-Busch InBev had a market share of nearly 48% of the market.  During the ensuing 10 years, the market shifted significantly from large brewers and importers to smaller brewers and importers.  By 2020, Anheuser Busch InBev had a market share of about 39%.  The major beneficiaries of this market shift have been the craft brewers, Performance Leaders, most of whom serve only local markets with high-priced locally brewed beer. The craft brewers now control around 13% of the total market.

For the last 10 years, the beer industry in the US has been flat. Volume grew by 1% in total, but sales grew only 0.1%.  Despite the slow growth in the broader market, the number of breweries grew at a rate of nearly 13% from 2016 to 2020.  The larger companies seem to have succeeded in shutting the door against new entrants at the Price Leader low end of the market. Instead, virtually all of the growth in the market is taking place at the higher end, in brewpubs, microbreweries, and superpremium beers and ales. The major brewers have yet to figure out how to slow the newer high-end entrants.  In this slow growing market, brewers are ramping up new product development to target fresh consumers. They are introducing hard seltzers, hard kombuchas, hard teas and coffees and CBD beverages, along with low alcohol and no alcohol beverages. These innovations are examples of product proliferation in a challenging market.

The large brewers have encouraged these new Performance Leader products because they have set prices relatively high in the industry. The question is: have they restarted the cycle of overcapacity? See HERE for more on that question.

8/22

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